If you’re inexperienced with borrowing money, or you’ve simply avoided taking on debt, you can expect a few challenges when applying for a home loan due to not having enough credit history for a mortgage.
While it’s important to understand how lack of credit limits your loan options, it’s not impossible to be a first-time homebuyer with no credit.
Here’s what you need to know about how to get a loan with no credit:
- Can You Buy a House With No Credit?
- How To Buy a House With No Credit
- Mortgage Options for Borrowers With No Credit
- How To Build Credit
- FAQ: How To Buy a House With No Credit
- The Bottom Line on Buying a Home With No Credit
Can You Buy a House With No Credit?
Living debt-free can be commendable, but it has downsides. In general, you need credit to buy a house. And while it’s possible to buy a home with no credit history, it might not be easy or straightforward.
What is credit?
Credit is the ability to buy now and pay later. Before lenders extend credit or a loan, they want to be confident that the borrower will repay the money. Lenders vet borrowers by looking at their history of taking on and repaying debts. This information comes from credit reports, which track that information over time.
Credit bureaus use your credit report to calculate your credit score, which is a three-digit number that quickly tells lenders how responsible you have been with your credit accounts. Credit scores range from 300 to 850, with lenders using these general ranges to group borrowers:
- Poor: 300-579.
- Fair: 580-669.
- Good: 670-739.
- Very good: 740-799.
- Excellent: 800-850.
If you’ve never had credit or only had credit for a short time, the credit bureaus may not have enough information on you to calculate an accurate credit score. This is called having a thin file.
How is your credit score calculated?
Though the exact algorithms used to create credit scores vary from company to company, some general factors are constant. For example, FICO credit scores, which are used by most lenders, consider the following factors:
- Payment history (35%).
- Amounts owed (30%).
- Length of credit history (15%).
- New credit (10%).
- Credit mix (10%).
Your payment history is the most important factor in determining your credit score, which is why it’s important to pay your bills in full and on time.
How much you owe is the second-most important factor, and is composed of two subfactors:
- How much debt you have. Less is better.
- Your credit utilization. This is how much of your available credit you’re using. The less you borrow compared to your credit limit, the better it is for your score.
Does it cost more to get a mortgage with no credit?
Yes. The better your credit, the lower the interest rate a lender likely will offer you on a mortgage.
For example, while someone with great credit might be offered a 6% interest rate, someone on the cusp of qualifying might have to pay 9% or more for the same loan. On a 30-year loan for $250,000, that’s a difference of more than $500 a month. A difference of just 1 percentage point in the interest rate moves the monthly payment by more than $150.
Having no credit also can lead to lenders charging higher fees or adding other costs to your loan to compensate for the complicated underwriting process.
Buying a home with no credit vs. bad credit vs. good credit
If you’re wondering how to buy a house with bad credit — usually defined as a FICO credit score lower than 580 — you could encounter trouble getting approved at all. Bad-credit home loans also tend to come with much higher interest rates.
Buying a home with bad credit is not the same as buying with no credit. Bad credit means you mishandled debt in the past. With no credit or a thin file, it’s tough for lenders to predict how you’ll handle borrowing money because there’s no past behavior to evaluate.
“Credit history is important because it shows the historical trend of a borrower paying or not paying their debts,” says Khari Washington, a broker and founder of First United Realty & Mortgage in Riverside, California. “Credit history also shows if someone is utilizing a lot of the revolving credit they have available and if they are likely living beyond their means.”
Getting a Mortgage With Different Credit Types
|No credit||Bad credit||Good credit|
|Interest rates||Very high.||High.||Reasonable.|
|Down payment requirements||10% or more.||3.5% to 10%.||As low as 3%.|
How To Buy a House With No Credit
If you want to buy a home with no credit, there are a few ways you can improve your odds of getting a mortgage.
Document your income and assets
Lenders care about your credit because they want to know how likely you are to pay back the loan. If you have a history of repaying debts, that’s a good sign. If you have a history of missing payments, lenders expect — fair or not — that trend will continue.
If you have no credit, you’ll have to prove to your lender that you can pay the loan and afford the house. Be ready to:
- Show steady employment and income.
- Verify that you make your rent payments.
- Prove you paid your bills.
- Document any savings or assets you own.
Increase your down payment
Lenders are more likely to approve a mortgage for buyers with thin or no credit if they save for a larger down payment. This decreases the amount you need to borrow, and allows you to start off with more home equity, which helps protect you from owing more on your home than it’s worth if home values decline.
Get a government loan
Some government loan programs have more-lenient requirements when it comes to minimum credit scores, so it’s worth checking out these programs to see if you qualify.
The Federal Housing Administration, Veterans Affairs, and the Department of Agriculture offer loan programs designed to help people buy homes. These programs are aimed at specific types of borrowers, such as first-time homebuyers, veterans, and people with lower income.
Consider manual underwriting
Underwriting is the lender’s process of reviewing and verifying your finances. Many lenders automate this process, but if you have a thin credit file, they can’t rely on the usual documents and data points. They may agree to perform manual underwriting, which involves a loan officer personally reviewing your finances. This allows your lender to bolster a thin file by including rent and utility payments in the evaluation.
Try a smaller lender
If you apply for a no-credit mortgage with a major lender and are denied, you might have better luck with other types of mortgage lenders, such as a credit union. These institutions are more likely to work with individual clients to help them secure financing. Also, credit unions are not-for-profit organizations, meaning they are less concerned about generating revenue and may be willing to take on riskier loans.
Get a co-signer or co-borrower
A co-signer is someone who meets the loan requirements and agrees to pay back your loan if you don’t. Your co-signer’s credit will be negatively affected by late or missed mortgage payments, so it’s important they are comfortable taking on that risk for you.
A co-borrower is someone who’s equally responsible for repaying the loan, such as a spouse.
If you can find a co-signer or co-borrower with better credit than yours, it should increase your chances of getting a loan.
Ask for seller financing
Although it’s unusual, you may be able to find a seller who will finance the sale themselves and extend a loan to you directly.
“Only a small portion of homes are financed by the seller,” Washington says. “If you can find it, many sellers will finance with poor or no credit.”
However, some potential trade-offs include larger down payment requirements, inflated mortgage rates, and fewer protections under the law.
Mortgage Options for Borrowers With No Credit
While most loans require borrowers to meet a minimum credit score, there are different types of mortgages that allow borrowers to have lower credit scores or no credit score at all.
FHA loans have some of the most lenient requirements, making them a good option for many first-time homebuyers and borrowers with no credit. If you have a nontraditional credit history, these lenders can evaluate your ability to repay debt in alternative ways. Apply through a private lender that offers FHA-insured loans.
Conventional mortgages are the most common type of home loan. There are two types of conventional mortgages: conforming and nonconforming.
A conforming loan means the mortgage adheres to standards set by Fannie Mae and Freddie Mac. These government-sponsored enterprises buy loans from lenders, allowing them to make more loans. Lenders that offer conforming loans are required to create a nontraditional credit profile for borrowers with insufficient credit.
Nonconforming loans are offered by private lenders and don’t meet the requirements to be sold to Fannie or Freddie. Most of these loans are for larger amounts, and often are known as jumbo loans. Lenders set their own terms for these loans, and typically prefer borrowers with strong credit.
VA loans allow military service members, veterans, and their surviving spouses to buy a home with no down payment. The VA doesn’t have a credit score requirement for getting a loan, which means it’s up to lenders whether to approve an application. Visit the VA’s eBenefits website to start the process of applying for a loan.
USDA loans are available for low- and moderate-income borrowers to buy homes in eligible rural areas. The USDA doesn’t set a down payment requirement, and the private lenders who issue USDA loans can perform manual underwriting for borrowers with no credit. To apply for a USDA loan, start by browsing active lenders.
Pros and cons of no-credit mortgage types
Every loan for borrowers with no credit has its pros and cons. Evaluating each program could help you find the right one for you:
Borrowing Requirements by Mortgage Type
|Loan type||Minimum down payment||Minimum credit score||Maximum DTI ratio|
|FHA||3.5% with a credit score of 580 and above, or 10% with a credit score between 500 and 579.||500.||43% or higher if additional requirements are met.|
|Conventional (conforming)||3%, or 20% to avoid PMI.||620.||36% (or higher if additional requirements are met) for manually underwritten loans; 50% for automatically underwritten loans.|
|VA||0%||Varies by lender.||41% or higher if additional requirements are met.|
|USDA||0%||Typically 640.||41% or higher if additional requirements are met.|
How To Build Credit
If you want to build credit, there are a few steps you can take:
- Pay bills on time. One of the best ways to build a good credit score is to pay all your bills in full and on time. Payment history is the most important factor in determining your credit score. You can set up automatic payments so that you don’t forget due dates — but make sure you have enough in your checking account to avoid overdraft fees.
- Reduce your existing debt. Since your total debt accounts for a good chunk of your credit score, paying down existing debt is a quick way to boost your score. “To obtain a better score quickly, get your revolving credit card and loan balances below 30% of the credit limit,” Washington says.
- Consider getting a secured credit card. These cards require you to pay a security deposit upfront, making them less risky for lenders. Charging expenses to a secured credit card and then paying off the balance each month will help you develop a positive credit history.
- Consider a credit-builder loan. These loans work like a savings plan. Instead of getting a sum of money and repaying it, you make a monthly payment until you’ve paid the loan amount and then you get the money. You pay fees and interest, but a credit-builder loan will live up to its name and help you build credit.
- Be an authorized user on someone else’s account. Instead of opening your own line of credit, consider asking someone you trust to add your name to one of their credit cards. You don’t need to use the card at all. As the primary cardholder continues to wield credit responsibly, their habits will help establish a positive credit history for you, too. However, if they miss any payments, your credit will suffer as well — so tread carefully.
- Request a rapid rescore. If you’ve recently improved your credit, Washington suggests getting your lender to perform a rapid rescore instead of waiting for the changes to show up on your credit report. “A lender can go through your credit and submit paperwork to the credit bureaus on your behalf, fixing any incorrect or outdated information on your credit report,” he says. Once your new, hopefully higher score is ready, it can be included in your mortgage application.
- Find a co-signer. Applying for a loan with a co-signer can help you qualify without having good credit. If you’re approved, you have the opportunity to build credit by making timely payments.
Why you shouldn’t try to build credit at the last minute
Good credit doesn’t happen overnight. Usually, it takes three to six months to establish a credit history at all — and many more to build excellent credit.
Additionally, every time you apply for credit, the lender will review your credit report. This is recorded on your file as a “hard inquiry.” Hard inquiries cause your credit score to drop by several points temporarily, so it’s counterproductive to try to build credit quickly by opening different credit cards right before applying for a mortgage.
If anyone offers you an instant good credit score or guaranteed credit repair for an upfront fee, it’s almost certainly a scam. Building credit may not be fast or particularly easy, but it’s something that you can do yourself for free.
FAQ: How To Buy a House With No Credit
Still have questions about buying a house with no credit? We answered some of the most common queries below.
Qualifying for a mortgage is possible with no credit history, but the exact requirements to get approved vary from lender to lender. Ultimately, you need to compare offers from different mortgage lenders and understand each lender’s underwriting requirements and process.
Making a larger down payment can increase your chances of getting approved for a mortgage. Borrowers with no credit score could try putting down more than 20% of the loan amount. If that’s not affordable, keep in mind there are mortgages — such as VA loans — that allow you to put nothing down even with no credit score. You should evaluate your borrowing options and see what type of loan fits your situation best.
A co-borrower isn’t the same as a co-signer. While both are financially responsible if a borrower can’t make their payments, a co-borrower makes regular payments and also legally owns the home. For example, a mortgage has co-borrowers when a married couple finances a home purchase together. A co-signer, on the other hand, is not considered one of the homeowners or borrowers. Instead, they agree to take over a loan only if the primary borrower defaults.
The Bottom Line on Buying a Home With No Credit
Buying a house when you don’t have a credit history can be difficult and complicated. Be prepared to shop around, submit additional documentation, and potentially pay more. A home is likely the most expensive purchase you’ll ever make, so it’s smart to strive for a good credit score before applying for a mortgage. That helps you get the best deal possible on your investment.
T.J. Porter contributed to the reporting of this article.